<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) January 24, 1994
TURNER BROADCASTING SYSTEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia
---------------------------------------
(State of incorporation or organization)
0-9334 58-0950695
------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
One CNN Center, Atlanta, Georgia 30303
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(404) 827-1700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
ITEM 7. EXHIBITS
(c) Exhibits
12(c) -- Statement re: computation of ratio of earnings to
fixed charges for interim period
12(d) -- Statement re: computation of pro forma ratio of
earnings to fixed charges
23(d) -- Consent of Price Waterhouse
23(e) -- Consent of Ernst & Young
99(a) -- Audited New Line Cinema Corporation consolidated
balance sheets as of December 31, 1992 and 1991,
and the related consolidated statements of
operations, shareholders' equity and cash flows for
the three years ending December 31, 1992.
99(b) -- Unaudited New Line Cinema Corporation condensed
consolidated balance sheet as of September 30, 1993
and the condensed consolidated statements of
operations and cash flows for the nine months
ended September 30, 1993 and 1992.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
TURNER BROADCASTING SYSTEM, INC.
(Registrant)
Date: February 3, 1994 By: /s/ WILLIAM S. GHEGAN
------------------------------------
Name: William S. Ghegan
Title: Vice President and Controller
and Chief Accounting Officer
-3-
<PAGE> 4
EXHIBIT INDEX
Exhibits Page
-------- ----
12(c) -- Statement re: computation of ratio of earnings
to fixed charges for interim period
12(d) -- Statement re: computation of pro forma ratio of
earnings to fixed charges
23(d) -- Consent of Price Waterhouse
23(e) -- Consent of Ernst & Young
99(a) -- Audited New Line Cinema Corporation consolidated
balance sheets as of December 31, 1992 and 1991,
and the related consolidated statements of
operations, shareholders' equity and cash flows for
the three years ending December 31, 1992.
99(b) -- Unaudited New Line Cinema Corporation condensed
consolidated balance sheet as of September 30, 1993
and the condensed consolidated statements of
operations and cash flows for the nine months
ended September 30, 1993 and 1992.
These exhibit numbers may not in all cases correspond to those in Item 601 of
Regulation S-K because of special requirements applicable to EDGAR filers.
<PAGE> 1
EXHIBIT 12(C)
TURNER BROADCASTING SYSTEM, INC.
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES FOR INTERIM PERIOD
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1992 1993
-------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT
RATIO AMOUNTS)
(A) Income before provision for income taxes, extraordinary
items and the cumulative effect of a change in accounting for
income taxes(a)............................................... $ 61,060 $113,008
-------- --------
-------- --------
Fixed charges
Interest expense(b)........................................... $159,462 $156,179
Interest capitalized.......................................... 0 0
Interest associated with rental agreements(c)................. 19,951 21,268
-------- --------
(B) Total fixed charges..................................... 179,413 177,447
Less interest capitalized..................................... 0 0
-------- --------
(C) Total fixed charges exclusive of interest capitalized... $179,413 $177,447
-------- --------
-------- --------
(D) Earnings before income taxes, extraordinary items, the
cumulative effect of a change in accounting for income taxes
and fixed charges exclusive of interest capitalized (A+C)..... $240,473 $290,455
-------- --------
-------- --------
Ratio of earnings to fixed charges (D/B)........................ 1.34 1.64
-------- --------
-------- --------
</TABLE>
- ---------------
(a) Excludes losses of less-than-fifty-percent owned entities for the nine-month
period ended September 30, 1993 of $13,848,000.
(b) Includes the Company's proportionate share of interest expense for the
nine-month periods ended September 30, 1992 and 1993 of $5,896,000 and
$5,421,000 associated with a joint venture.
(c) This charge represents one-third of consolidated rent expense, which the
Company believes to be a reasonable approximation of the interest factor.
<PAGE> 1
EXHIBIT 12(D)
TURNER BROADCASTING SYSTEM, INC.
COMPUTATION OF PRO FORMA RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1992 1993
-------------------- --------------------
PRO FORMA PRO FORMA
FOR THE ACQUISITIONS FOR THE ACQUISITIONS
AND THE NEW LINE AND THE NEW LINE
MERGER MERGER
-------------------- --------------------
(IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<S> <C> <C> <C>
(A) Income before gain on issuance of stock,
provision for income taxes, extraordinary items and
the cumulative effect of a change in accounting for
income taxes(a)..................................... $ 46,516 $ 81,584
----------- -----------
----------- -----------
Fixed charges
Interest expense.................................... $237,340 $177,074
Interest capitalized................................ 6,454 4,435
Interest associated with rental agreements(b)....... 22,910 21,738
----------- -----------
(B) Total fixed charges........................... 266,704 203,247
Less interest capitalized........................... 6,454 4,435
----------- -----------
(C) Total fixed charges exclusive of interest
capitalized.............................. $260,250 $198,812
----------- -----------
----------- -----------
(D) Earnings before gain on issuance of stock, provision
for income taxes, extraordinary items, the
cumulative effect of a change in accounting for
income taxes and fixed charges exclusive of interest
capitalized (A+C)................................... $306,766 $280,396
----------- -----------
----------- -----------
Ratio of earnings to fixed charges (D/B).............. 1.15 1.38
----------- -----------
----------- -----------
</TABLE>
- ---------------
(a) Excludes earnings of less-than-fifty-percent owned entities for the pro
forma year ended December 31, 1992 of $6,690,000 and losses of
less-than-fifty-percent owned entities for the pro forma nine-month period
ended September 30, 1993 of $11,952,000.
(b) This charge represents one-third of consolidated rent expense, which the
Company believes to be a reasonable approximation of the interest factor.
<PAGE> 1
EXHIBIT 23(D)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
Supplement constituting part of this Registration Statement on Form S-3 of our
report dated February 15, 1993, which appears on page 65 of the 1992 Annual
Report to Shareholders of Turner Broadcasting System, Inc., which is
incorporated by reference in Turner Broadcasting System, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1992. We also consent to the
incorporation by reference of our report on the Financial Statement Schedules,
which appears on page 36 of such Annual Report on Form 10-K. We also consent to
the references to us under the headings "Experts" and "Selected Historical
Financial Information" in such Prospectus Supplement. However, it should be
noted that Price Waterhouse has not prepared or certified such "Selected
Historical Financial Information."
PRICE WATERHOUSE
Atlanta, Georgia
January 21, 1994
<PAGE> 1
EXHIBIT 23(E)
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus Supplement accompanying the Prospectus constituting part of the
Registration Statement (Form S-3, No. 33-62218) of Turner Broadcasting System,
Inc. ("TBS"), and to the incorporation by reference therein of our reports dated
February 9, 1993, with respect to the consolidated financial statements and
schedules of New Line Cinema Corporation included in the Current Report on
Form 8-K of TBS, filed with the Securities and Exchange Commission on
January 24, 1994. We further consent to the incorporation by reference therein
of our report dated February 25, 1993, with respect to the financial
statements of Castle Rock Entertainment (A California General Partnership)
included in the Current Report on Form 8-K of TBS filed with the Securities
and Exchange Commission on December 28, 1993.
ERNST & YOUNG
New York, New York
January 24, 1994
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
NEW LINE CINEMA CORPORATION
We have audited the accompanying consolidated balance sheets of New
Line Cinema Corporation and subsidiaries as of December 31, 1991 and 1992, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1992. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of New Line Cinema Corporation and subsidiaries at December 31, 1991 and 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1992 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
ERNST & YOUNG
New York, New York
February 9, 1993
<PAGE> 1
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Exhibit 99(a)
December 31,
-------------------------------------
1991 1992
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,333,485 $ 1,849,698
Accounts receivable, less allowance for doubtful accounts of 37,036,691 35,968,253
approximately $515,000 in 1991 and $640,000 in 1992
Film inventories (Note 1) 136,437,632 147,775,148
Property and equipment, less accumulated depreciation and
amortization of approximately $3,616,000 in 1991 and
$5,425,000 in 1992 5,121,414 10,309,209
Note receivable from officers and other related parties (Note 11) 1,895,000 1,965,000
Other assets 3,787,310 6,540,881
Investment in affiliated company (Note 2) 10,728,021 17,937,997
----------- -----------
Total assets $ 199,339,553 222,346,186
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 17,728,699 8,218,481
Third party participations payable (Note 1) 29,528,547 23,834,301
Note payable to bank (Note 3) -- 58,500,000
Long-term debt (Note 4) 30,000,000 30,000,000
Defered income 49,825,702 21,702,987
Deferred income taxes (Note 5) 6,618,203 7,800,121
----------- -----------
Total liabilities 133,701,151 150,055,890
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity (Notes 8,9, and 10):
Preferred Stock, par value $.01 per share; 300,000 shares
authorized; none outstanding -- --
Common Stock, $.01 par value; 50,000,000 shares authorized,
issued: 1991, 12,671,651 shares; 1992, 12,728,560 shares 126,716 127,285
Capital in excess of par value 37,592,837 37,825,947
Retained earnings 28,134,133 34,552,348
----------- -----------
65,853,686 72,505,580
Treasury Stock, 64,677 shares at cost (215,284) (215,284)
------------ -----------
Total stockholders' equity 65,638,402 72,290,296
------------ -----------
Total liabilities and stockholders' equity $ 199,339,553 $ 222,346,186
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE> 2
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1990 1991 1992
---- ---- ----
<S> <C> <C> <C>
Revenue $133,141,090 $225,686,168 $227,001,696
Costs relating to revenue 109,720,831 192,190,621 194,653,113
----------- ----------- -----------
Gross income 23,420,259 33,495,547 32,348,583
Operating expenses:
General and administrative 12,170,368 17,510,275 21,980,853
Selling 683,166 912,367 1,406,224
Depreciation and amortization 876,908 1,820,875 2,809,025
----------- ----------- -----------
13,730,442 20,243,517 26,196,102
----------- ----------- -----------
Income from operations 9,689,817 13,252,030 6,152,481
Interest expense (Notes 3 and 4) 575,000 227,397 3,685,197
Other charges 148,676 323,841 248,771
----------- ----------- -----------
Income before equity in income of, and gain on
issuance of stock by affiliated company and
provision for income taxes 8,966,141 12,700,792 2,218,513
Equity in income of affiliated company (Note 2) 700,000 1,065,000 2,355,000
Gain on issuance of stock by affiliated company
(Note 2) -- -- 4,334,864
----------- ----------- -----------
Income before provision for income taxes 9,666,141 13,765,792 8,908,377
Provision for income taxes (Note 5) 3,407,000 4,824,000 2,490,162
----------- ----------- -----------
Net income $ 6,259,141 $ 8,941,792 $ 6,418,215
========== ========== ==========
Primary net income per share of Common Stock $.58 $.66 $.45
==== ==== ====
Fully diluted net income per share of Common
Stock $.58 $.64 $.45
==== ==== ====
Primary weighted average number of shares of
outstanding Common Stock 10,861,045 13,592,804 14,282,039
========== ========== ==========
Fully diluted weighted average number of shares of
outstanding Common Stock 10,861,045 13,880,687 14,326,653
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial stataments.
-2-
<PAGE> 3
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1990, 1991 AND 1992
<TABLE>
<CAPTION>
Capital in Common
Common Excess of Retained Stock Held in
Stock Par Value Earnings Treasury Total
------ ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1990 $62,483 $ 9,929,197 $12,933,200 $(280,943) $22,643,937
Issuance of 104,820 shares of Common Stock
upon exercise of options 1,048 143,400 -- -- 144,448
Sale of 600,000 shares of Common Stock 6,000 5,840,465 -- -- 5,846,465
Issuance of 7,577 shares of Common Stock held in
treasury to Employee Stock Ownership Plan -- (9,623) -- 55,085 45,462
Issuance of 1,718,214 shares of Common Stock
upon declaration of 25% stock dividend 17,182 (17,070) -- (112) --
Effect of issuance of 1,734,247 shares of
Common Stock upon declaration of 20% stock
dividend 17,342 (17,231) -- (111) --
Net income -- -- 6,259,141 -- 6,259,141
------- --------- --------- --------- ----------
Balance, December 31, 1990 104,055 15,869,138 19,192,341 (226,081) 34,939,453
Issuance of 165,670 shares Common Stock
upon exercise of options 1,656 1,010,954 -- -- 1,012,610
Sale of 1,910,000 shares of Common Stock 19,100 18,744,489 -- -- 18,763,589
Issuance of 190,500 shares of Common Stock 1,905 1,953,720 -- -- 1,955,625
Issuance of 2,226 shares of Common Stock held in
treasury to Employee Stock Ownership Plan -- 14,536 -- 10,797 25,333
Net income -- -- 8,941,792 -- 8,941,792
------- --------- --------- --------- ----------
Balance, December 31, 1991 126,716 37,592,837 28,134,133 (215,284) 65,638,402
Issuance of 56,909 shares of Common Stock
upon exercise of options 569 233,110 -- -- 233,679
Net income -- -- 6,418,215 -- 6,418,215
------- --------- --------- --------- ----------
Balance, December 31, 1992 $127,285 $37,825,947 $34,552,348 $(215,284) $72,290,296
======== =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year ended December 31,
---------------------------------------------------
1990 1991 1992
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,259,141 $ 8,941,792 $ 6,418,215
Adjustments to reconcile net income to net cash used
in operating activities:
Increase (decrease) in bad debt allowance (117,347) 68,968 124,655
Amortization of film inventories 59,945,508 93,588,978 131,678,221
Depreciation and other amortization 876,908 1,820,875 2,809,025
Shares of Common Stock issued to Employee Stock
Ownership Plan 45,462 25,333 --
Undistributed earnings from affiliated company (700,000) (1,065,000) (2,355,000)
Non cash gain on issuance of stock by affiliated
company -- -- (4,897,476)
Deferred income taxes 2,551,000 1,931,000 1,181,918
Changes in other assets and liabilities:
(Increase) decrease in:
Accounts receivable (8,119,666) (14,452,030) 943,783
Gross film inventories (88,054,387) (154,848,255) (143,015,737)
Other assets (423,811) 520,016 (3,338,290)
(Decrease) increase in:
Accounts payable and accrued expenses 2,789,303 12,921,129 (9,510,218)
Third party participations payable -- net 19,933,728 524,600 (5,694,246)
Deferred income 4,583,094 40,239,776 (28,122,715)
------------ ------------- -------------
Cash used in operating activities (431,067) (9,782,818) (53,777,865)
INVESTING ACTIVITIES
Purchase of property and equipment (1,503,806) (3,684,956) (6,996,958)
Investment in affiliated company (8,843,584) (119,437) --
Notes receivable from officers and other related
parties (950,000) (745,000) (70,000)
------------ ------------- -------------
Cash used in investing activities (11,297,390) (4,549,393) (7,066,958)
FINANCING ACTIVITIES
Net proceeds from borrowings on note payable 49,066,189 43,308,301 62,127,357
Repayment of note payable (42,700,000) (76,200,000) (4,000,000)
Net proceeds from issuance of long-term debt -- 28,840,171 --
Net proceeds from issuance of shares of Common
Stock 5,990,913 21,731,824 233,679
------------ ------------- -------------
Cash provided by financing activities 12,357,102 17,680,296 58,361,036
------------ ------------- -------------
Increase (decrease) in cash and cash equivalents 628,645 3,348,085 (2,483,787)
Cash and cash equivalents at beginning of period 356,755 985,400 4,333,485
------------ ------------- -------------
Cash and cash equivalents at end of period 985,400 $ 4,333,485 $ 1,849,698
============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation
New Line Cinema Corporation (the "Company") is a motion picture production
and distribution company. The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Film Inventories
Film inventories consist of the cost of the Company's productions,
acquired films, prints and certain exploitation costs including advertising
costs expected to benefit the films in future markets, the cost of acquiring
certain rights for domestic home video and foreign distribution of certain
films and capitalized interest and overhead related to production of films and
acquisition of film rights. Such inventories are stated at the lower of
unamortized costs or net realizable value generally on a film-by-film basis.
The costs of films released are amortized using the individual-film-forecast
- -computation method which amortizes costs in the same ratio that current gross
revenues bear to anticipated total gross revenues. The costs of distribution
rights are amortized in the same ratio that fees earned in the current period
from the rights bear to anticpated total fees. Such anticipated total gross
revenues and fees are estimated by management.
The anticipated total gross revenue and fees are reviewed periodicially,
which may result in revised amortization rates and, when applicable,
write-downs to net realizable value.
Film inventories, net of accumulated amortization, approximated the
following (in thousands):
December 31,
---------------------------------
1991 1992
---- ----
Films released $ 76,029 $ 62,784
Films completed but not released 22,549 41,519
Films in process 21,488 30,557
Distribution rights 16,372 12,915
------- -------
$ 136,438 $ 147,775
======= =======
Based on the Company's anticipated total gross revenue estimates, over
95% of released film inventories at December 31, 1992 will be amortized within
the three-year period ending December 31, 1995.
Property and Equipment; Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
estimate useful life used for property and equipment is ten years, while the
life used for computer hardware and software is three years. Leasehold
improvements are amortized over the estimated useful lives of the related
assets or the term of the lease, whichever is shorter.
Revenue Recognition
Revenue from theatrical exhibition of films is reflected in the
accompanying consolidated financial statements when the film is exhibited.
Revenue from the sale of film rights, principally for the
-5-
<PAGE> 6
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
home video, syndicated television and pay cable television markets is
recognized when the film is available for showing or exploitation. Amounts
received prior to the film's availability are classified as deferred income.
Films with theatrical releases (which generally may continue for up to six
months) are generally made available for release in other media as follows:
Months After Approximate
Market Initial Release Release Period
------ --------------- --------------
Domestic home video 4-6 months --
Domestic pay-per-view 6-9 months 3 months
Domestic pay television 10-18 months 12-21 months
Domestic network or basic cable 30-36 months 18-36 months
Domestic syndication 30-36 months 3-15 years
Foreign theatrical -- 4-6 months
Foreign home video 6-12 months --
Foreign television 18-24 months 18-30 months
For the years ended December 31, 1990, 1991 and 1992 approximately 71%, 63%
and 44%, respectively, of the Company's total revenue was attributable to two
films, four films and six films, respectively.
Foreign revenue related to the Company's films approximated 12%, 11% and 24%
of total revenue for the years ended Decmeber 31, 1990, 1991 and 1992,
respectively.
Third Party Participations
Total expected third party participations are charged to expense in the same
ratio as current gross revenues bear to anticipated total gross revenues. At
December 31, 1992, the portion of third party participations payable within one
year was approximately $5,487,000.
Concentration of Credit Risks
The Company licenses various rights in its motion pictures to distributors
throughout the world. Generally payment is received in full or in part, or
letters of credit are obtained, prior to the Company's release of the films to
its distributors.
Income Taxes
Deferred income taxes result from timing differences between the amounts
reported for financial reporting and income tax purposes. These differences
related primarily to the gain on issuance of stock by an affiliated company,
advertising and print expenditures, third party participations, and film
amortization.
Common Stock Data
Primary and fully diluted net income per share of Common Stock and Common
Stock equivalents are based on the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding.
Transactions in Shares of Affiliated Companies
The Company recognizes as separate non-operating income, gains, and losses
arising from sales of previously unissued stock by a subsidiary or affiliate to
outside investors when such sales change the Company's percentage of ownership
in such companies.
-6-
<PAGE> 7
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
Long-Term Debt: The fair value of the Company's long-term debt is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
Company believes the carrying amounts reported in the balance sheet for these
instruments is approximately equal to their fair value.
Reclassification
Certain amounts in 1990 and 1991 have been reclassified to conform to
the 1992 presentation.
2. INVESTMENT IN AFFILIATED COMPANY
On October 26, 1990, the Company acquired from RHI Entertainment,
Inc. ("RHI") 52.6% of RHI's outstanding capital stock for $8,700,000. A
portion of the excess of cost over the Company's equity in RHI, consists of
goodwill of $850,000 which is being amortized over a 20-year period and an
option valued at $1,270,000 to acquire additional shares of RHI capital stock.
The investment is accounted for under the equity method, as the Company does
not have majority voting control of RHI. The Company has the right to
designate two of the five members of RHI's board of directors and all major
decisions as to the financing and operations of RHI require a super majority
vote of the board of directors of RHI. RHI is a leading producer of
movies-of-the-week, mini-series and other programming for the United States
television market. RHI has acquired the worldwide television rights of Qintex
Entertainment Inc., including Hal Roach and Robert Halmi titles. In April
1992, in exchange for $561,000 paid by the Company to one of the principals of
RHI, such principal cancelled an option to acquire shares of Common Stock of
RHI owned by the Company.
On July 29, 1992, RHI issued 2,315,000 shares of its common stock at
$10 per share, in an initial public offering, resulting in aggregate gross
proceeds of $23,150,000. This issuance reduced the Company's interest in the
capital stock of RHI to 37.4%. As a result, the Company recognized a gain of
$4,335,000 (before provision for income taxes of $1,647,000) which reflects a
reduction by $3,512,000 in the carried amount of its investment which was
deemed sold. Income taxes provided on the gain are not payable until the gain
is recognized for tax purposes, such as from an actual sale of RHI stock by the
Company.
Summary financial information for RHI as of and for the years ended
December 31, 1990, 1991 and 1992 is as follows:
1990 1991 1992
------- ------- -------
Cash $ 964,000 $ 752,000 $241,000
Accounts receivable 11,647,000 8,607,000 29,654,000
Film production costs 27,537,000 41,853,000 55,681,000
Total assets 42,146,000 55,337,000 90,049,000
Notes payable to bank 19,391,000 21,234,000 17,384,000
Deferred revenue 4,454,000 12,667,000 17,796,000
Shareholders' equity 13,405,000 15,902,000 42,367,000
Revenue 13,325,000 33,252,000 56,472,000
Film costs 8,811,000 22,285,000 42,037,000
Net income 1,569,000 2,498,000 5,646,000
The Company's consolidated retained earnings at December 31, 1992
includes $4,120,000 related to the equity in income of RHI. Equity in income
of RHI is considered permanently reinvested since RHI is restricted from paying
dividends in accordance with its credit agreements and therefore, the Company
has not provided income taxes on this amount.
-7-
<PAGE> 8
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTE PAYABLE TO BANK
The Company's Credit Facility provides revolving credit of $75,000,000
secured by all assets of the Company currently owned or acquired in the future.
Interest is payable quarterly at a rate equal to the Alternate Base Rate (as
defined) plus a margin or the London InterBank Offered Rate plus a margin in
the case of a Eurodollar loan. A commitment fee of 3/8 of 1% is charged on the
average unused annual balance. In addition, the Company is required to
maintain $5,000,000 of insurance on the life of the Chief Executive Officer of
the Company. The credit facility terminates on June 30, 1993.
The credit facility contains various covenants which, among other
things, (i) provide that minimum consolidated tangible net worth, as defined,
must be maintained by the Company, (ii) limit the incurrence of additional
indebtedness, (iii) prohibit the payment of cash dividends as long as an
outstanding loan balance exists, (iv) limit the amount of certain capital
expenditures, (v) limit the amount of certain production and preproduction
costs per film in active production or preproduction, for a maximum of eight
such films at any one time and no more than three such films to be in principal
photography at any one time, (vi) restrict the amount to be paid to acquire
rights in films produced by others and (vii) require that the Company's Chief
Executive Officer maintain his ownership of the Company, as defined, and remain
as its Chief Executive Officer.
Other information relating to the note payable under the existing and
prior credit facilities during the three year period ended December 31, 1992 is
summarized below:
<TABLE>
<CAPTION>
1990 1991 1992
---- ---- ----
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
during year $34,000,000 $39,000,000 $62,500,000
Daily average amount of borrowings outstanding
each year $14,728,000 $14,533,000 $38,273,000
Weighted average interest rate for year 11.0% 9.5% 6.4%
Interest rate at December 31 10.5% 7.5% 7.0%
Interest expense, net of capitalized amounts $ 575,000 $ 99,000 $ 708,000
Capitalized interest $ 1,185,000 $ 1,379,000 $ 1,885,000
</TABLE>
Interest paid under the credit facility (net of capitalized amounts)
amounted to approximately $575,000, $99,000, and $437,000 in 1990, 1991 and
1992, respectively. In 1992, the Company also incurred approximately $2,900,000
of interest related to a $40,000,000 advance received from Columbia TriStar Home
Video.
Commitment fees under the agreements were immaterial for each of the
three years in the period ended December 31, 1992.
In February 1993, the Company received a commitment for the replacement
of the existing credit facility with a new credit facility which would provide
up to $150,000,000 of available credit with a syndicate of banks. The new
credit facility is subject to certain conditions, including final
documentation. Except for the increase in principal amount and a restriction
on the amount of permitted increase in selling, general and administrative
expenses, the terms for the proposed new facility would not materially differ
from the existing facility's terms. The Company has in the past been able to
renew or extend the maturities on its credit facilities, although there can be
no assurance that the new credit facility will be obtained.
4. LONG-TERM DEBT
On November 14, 1991, the Company issued $30,000,000 of convertible
subordinated debentures which are convertible at the option of the holder into
shares of the Company's common stock at $16 7/8 per share, for a total of
1,777,778 shares. The debentures are payable with interest at 6 1/2% payable
-8-
<PAGE> 9
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
semi-annually and are due November 15, 2006. Annual sinking fund payments of
$3,500,000, commencing November 15,2000, are calculated to retire 70% of the
debentures prior to maturity. The debentures are redeemable at the option of
the Company, in whole or in part, at the following redemption prices together
with accrued and unpaid interest commencing on each November 15 in the years
set forth below:
1993 104%
1994 103%
1995 102%
1996 101%
1997 and thereafter 100%
The debentures are not redeemable by the Company before November 15,
1993 and from that date until November 15, 1994, are not redeemable
unless the average price of the Company's common stock for a defined period
exceeds 150% of the conversion price.
For the years ended December 31, 1991 and 1992, the Company incurred
interest charges of $243,750 and $1,950,000, respectively, of which
approximately $215,000 and $1,853,000 was capitalized. Interest paid (net of
capitalized amounts) amounted to $97,000 in 1992.
5. INCOME TAXES
The provision for income taxes approximated the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------------------------
1990 1991 1992
-------------------------------------------------------------------------------------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ --- $2,099,000 $2,099,000 $2,099,000 $814,000 $2,913,000 $ 863,000 $ 57,000 $ 920,000
Foreign withholding 763,000 --- 763,000 1,146,000 --- 1,146,000 1,185,000 --- 1,185,000
State and local 93,000 452,000 545,000 610,000 155,000 765,000 270,000 115,000 385,000
-------- ---------- ---------- ---------- -------- ---------- ---------- -------- -----------
$856,000 2,551,000 3,407,000 3,855,000 $969,000 $4,824,000 $2,318,000 $172,000 2,490,000
======== ========== ========== ========== ======== ========== ========== ======== ===========
</TABLE>
The difference between the statutory federal income tax rate of 34% and
the taxes actually provided for the years ended December 31, 1990, 1991 and
1992, approximated the following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1990 1991 1992
--------- ---------- ----------
<S> <C> <C> <C>
Taxes based on statutory federal income
tax rate $3,287,000 $4,681,000 $3,029,000
Add (deduct):
Equity in income of affiliated company
permanently reinvested (235,000) (362,000) (801,000)
State and local taxes, net of federal tax
benefit 360,000 505,000 252,000
Other (5,000) --- 10,000
---------- ---------- ----------
$3,407,000 $4,824,000 $2,490,000
========== ========== ==========
</TABLE>
-9-
<PAGE> 10
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The deferred tax provision for the years ended December 31, 1990, 1991 and
1992 includes the following tax effects of timing differences which are
expensed or recognized as revenue in different periods for financial statement
and tax purposes:
<TABLE>
<CAPTION>
1990 1991 1992
---------- ---------- ----------
<S> <C> <C> <C>
Advertising and print expenditures $2,642,000 $2,003,000 $ 26,000
Amortization of film inventories 226,000 2,203,000 (785,000)
Gain on issuance of stock by affiliated
company --- --- 1,647,000
Third party participations --- (3,375,000) (445,000)
Foreign tax credits (269,000) 269,000 ---
Depreciation of fixed assets (125,000) (159,000) (163,000)
Allowance for bad debts --- --- (48,000)
Other 77,000 28,000 (60,000)
---------- ---------- ----------
$2,551,000 $ 969,000 $ 172,000
========== ========== ==========
</TABLE>
Income taxes paid amounted to approximately $1,512,000, $798,000 and
$2,165,000 in 1990, 1991 and 1992, respectively.
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement No. 109, "Accounting for Income Taxes," which the Company is required
to adopt in 1993. Under the new rules, deferred taxes are recognized using the
liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Deferred tax assets and liabilities are adjusted for tax rate changes. Under
the rules presently being applied (APB Opinion 11), deferred taxes are measured
using tax rates for the year in which timing differences arise. Deferred taxes
are not adjusted for tax rate changes.
The Company has accumulated the necessary information and will apply the new
rules starting the first quarter of 1993. Application of the new rules will not
have a material impact on the Company's financial statements. The Company has
determined that it will record the cumulative effect of the change in 1993 and
will not restate prior years' financial statements to reflect adoption of the
new rules.
6. RENT EXPENSE AND LEASE COMMITMENTS
The Company occupies office space under various operating leases. In
addition to the base annual rental, the leases provide for certain escalation
charges based on increases in operating expenses of the buildings. Rent expense
amounted to approximately $543,000, $868,000 and $1,245,000 for the years ended
December 31, 1990, 1991, and 1992, respectively. At December 31, 1992, minimum
noncancellable commitments under these leases were as follows:
1993 $ 1,584,000
1994 1,621,000
1995 1,636,000
1996 1,696,000
1997 1,201,000
Thereafter 9,805,000
-----------
$17,543,000
===========
-10-
<PAGE> 11
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
In December 1992, the Company, its Chairman, President and another
officer of the Company, were named as defendants in an action brought by
Troma, Inc. in the Supreme Court of the State of New York, County of New
York. The action seeks unspecified damages in an amount "no less than $50
million" for breach of an agreement which allegedly required the Company to
produce and distribute a film based upon the characters owned by the plaintiff.
No answer has yet been filed, and the Company is considering its possible
counterclaims against the plaintiff and its principal officers. The claims in
the action against the Company's officers are covered by the Company's
directors' and officers' liability insurance policy.
In May 1992, the Company, Allied Vision, Ltd. ("Allied") and Innovation
Books, a division of the Innovative Corporation, were named as defendants in an
action brought by Stephen King in the United States District Court for the
Southern District of New York. The action sought to ban the use of Mr. King's
name in connection with the film "The Lawnmower Man" (the "Film"). Mr. King
seeks unspecified damages under the Lanham Act and New York common law. The
Company owns the Film's North American distribution rights. The Film has
completed its theatrical release in the United States, and had its home video
release on August 26, 1992. The United States Court of Appeals for the Circuit
Court has partly reversed an order of the District Court, and as a result the
defendants have been able to continue to refer to the Film as based upon a
short story written by Mr. King, but are prohibited from further use of Mr.
King's name in a "possessory credit" in the title of the Film. The Company's
defense and indemnification of up to $1 million is being provided under a
liability insurance policy provided in connection with the Film.
In June 1990, an action was brought against the Company in the Supreme
Court, New York County, by Smart Egg Pictures, SA, one of the joint venturers
with the Company in the first two "Nightmare on Elm Street" films. The
plaintiff alleges that the Company wrongfully induced it to enter into an
agreement diminishing its rights in the joint venture assets. The action seeks
an accounting and damages of at least $5,000,000, together with punitive
damages and treble damages under the RICO laws, in connection with the series
of "A Nightmare on Elm Street" films.
The Company and its subsidiaries are parties to various other legal
proceedings, all of which are considered routine and incidental to the
business of the Company and are not material to the financial condition and
operation of the business. In management's opinion, the ultimate outcome of
these legal proceedings, as well as the lawsuits discussed above, will not have
a material adverse effect on the results of operations in any one year. At
this time, the Company cannot predict the outcome nor estimate the range of
loss for the lawsuits discussed above.
Acquisition of Distribution Rights
In addition to the film inventories recorded on the Consolidated
Balance Sheet at December 31, 1992, the Company is contractually committed to
advancing funds, in accordance with contract terms, for the acquisition rights
to films which will be completed subsequent to December 31, 1992. These
unrecorded contractual commitments were approximately $36,000,000 at December
31, 1992.
8. EMPLOYEE BENEFIT PLANS
Pension Expense
Certain employees of certain subsidiaries of the Company are covered
under collective bargaining agreements. All such union employees are covered
by multiemployer defined benefit pension plans. The Company makes
contributions to such plans based on amounts specified in the related union
contracts. The unions have informed the Company that they are unable to
provide the actuarial present values of accumulated plan benefits or the plans'
net assets available for benefits with respect
-11-
<PAGE> 12
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
to any individual firm, including the Company. The Company contributed
approximately $462,000, $755,000 and $1,531,000 during the years ended December
31, 1990, 1991, and 1992, respectively, to such plans.
Employee Stock Ownership Plan
The Employee Stock Ownership Plan ("ESOP") enables participating
employees to acquire a proprietary interest in the Company. The Company may
make annual contributions to the ESOP not to exceed 15% of the compensation
paid or accrued during the plan year to all members. Payment of benefits may
be in the form of either shares of Common Stock or cash, or partly in cash and
stock. If a cash distribution is made in lieu of stock, it will be based on
the market value of shares of the Company's Common Stock. Approximately
$24,000 was accrued by the Company for the ESOP in 1992. No contributions were
made by the Company to the ESOP in 1992. The Company issued to the ESOP 7,577
and 2,226 shares of Common Stock in 1990 and 1991, respectively.
Executive Benefit Trust
Effective November 1, 1991, the Company established the New Line
Cinema Corporation Executive Benefit Trust (the "Trust") to provide incentive
compensation to certain executive employees. The Trust is not intended to
provide retirement income to employees, or to provide for a deferral of income
by employees for periods extending to the termination of covered employment or
beyond.
401(k) Plan
In December 1992, the Company adopted a 401(k) defined contribution
plan (the "Plan") for certain of its employees. Employees can make voluntary
contributions to the plan subject to certain limitations. Eligible employees
are those who have reached age 21 and have worked at least 1,000 hours. No
contribution was made to the Plan by the Company in 1992.
9. CAPITAL STOCK
Stock Dividend
On July 18, 1990, the Board of Directors declared a 25% stock dividend
accounted for as a five for four share stock split on all of the Company's
outstanding Common Stock to holders of record as of June 27, 1990. On February
5, 1991, the Board of Directors declared a 20% stock dividend to be accounted
for as a six for five share stock split on all of the Company's outstanding
Common Stock to holders of record as of February 14, 1991.
Reserved Shares of Common Stock
At December 31, 1991 and 1992, the Company had reserved 2,722,003 and
3,083,637 shares, respectively, of Common Stock for grant and exercise of stock
options. In addition, shares reserved for future issuance include 1,777,778
shares for the conversion of the 6.5% convertible subordinated debentures (see
note 4) and 250,000 shares reserved for Nelson Holdings International, Ltd.
(see note 11). Solely as a result of the completion of a proposed public
offering of 2,000,000 shares of Common Stock pursuant to a registration
statement on Form S-3 filed in January 1993, the Company's Chairman will be
granted options to purchase approximately 659,600 additional shares of Common
Stock at the market price of the Common Stock on March 31, 1993, pursuant to
the operation of the provisions of his Employment Agreement. The terms of this
Employment Agreement provide the Company's Chairman the ability to maintain his
holdings at approximately 25% of the outstanding Common Stock of the Company
(as defined).
-12-
<PAGE> 13
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS
Qualified Stock Option Plan
In July 1986, the Company adopted an incentive stock option plan (the
"Plan") which was designed to qualify under Section 422A of the Internal
Revenue Code of 1954, as amended.
Under the Plan, a committee of independent members of the Board of
Directors is authorized to grant options to purchase up to 577,500 shares of
Common Stock to officers and employees of the Company at a price per share
equal to at least 100% of the fair market value of Common Stock on the date of
the grant (110% of such fair market value for optionees who directly or
indirectly possess more than 10% of the total combined voting power or value of
all classes of the stock of the Company or any parent or subsidiary thereof
("10% Stockholder")).
Each qualified option granted is exercisable for such time as
determined by the Board of Directors but, in no event more than ten years from
the date of grant (no more than five years from the date of a qualified option
to 10% Stockholders). The Plan will terminate upon the earlier of (i) the date
on which all shares available for issuance have been issued pursuant to the
valid exercise of options granted thereunder and (ii) May 15, 1996.
1990 Stock Option Plan
On February 18, 1990, the Company adopted the 1990 Stock Option Plan
(the "1990 Plan") under which a committee of independent members of the Board
of Directors is authorized to grant options for 750,000 shares under the 1990
Plan, to any full-time employee, subject to adjustment for stock splits, stock
dividends and certain other events. The 1990 Plan is similar to the 1986 Plan,
except that options under the 1990 Plan may be incentive stock options and the
grant may allow options to be exercised by the surrender of Common Stock or
options to acquire Common Stock having a market value equal to the aggregate
exercise price of the option. As of December 31, 1992, options for a total of
554,199 shares of Common Stock were granted under the 1990 Plan, all of which
were outstanding.
1991 Stock Option Plan
On January 14, 1992, the Company's Board of Directors adopted a new
Stock Option Plan (the "1991 Plan"), which is identical to the 1990 Plan
except that options for a total of 250,000 shares of the Company's Common Stock
may be granted thereunder. As of December 31, 1992, options for a total of
200,000 shares of Common Stock were granted under the 1991 Plan, all of which
are outstanding.
-13-
<PAGE> 14
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS (CONTINUED)
10. STOCK OPTIONS (CONTINUED)
Summary
The activity in stock options during the three-year period ended December
31, 1992 is summarized below. The information takes into account the 25% stock
dividend issued on June 27, 1990 and the 20% stock dividend issued on February
28, 1991.
<TABLE>
<CAPTION>
Nonqualified Stock Options Qualified Stock Options
-------------------------- ------------------------
Aggregate Aggregate
Shares Amount Shares Amount
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Options outstanding at January 1, 1990 973,453 $ 496,083 282,276 $1,002,187
Granted (from $5.32 to $6.83 and from $4.50
to $11.77 per share) 1,070,357 6,470,729 393,430 2,359,953
Exercised (at $.47 and from $2.88 to $4.24
per share) (104,098) (49,238) (24,152) (78,817)
---------- ----------- ----------- ----------
Options outstanding at December 31, 1990 1,939,712 6,917,574 651,554 3,283,323
Granted (from $10.13 to $16.00 and from
$9.81 to $13.38 per share) 255,063 2,960,393 41,425 499,429
Exercised (at $.47 and from $3.33 to $5.42
per share) (111,374) (52,680) (54,377) (299,727)
---------- ----------- ----------- ----------
Options outstanding at December 31, 1991 2,083,401 9,825,287 638,602 3,553,025
Granted (from $11.25 to $15.00 and from
$12.25 to $15.75 per share) 309,982 4,395,156 112,351 1,545,308
Exercised (at $5.42 and from $2.05 to $6.04
per share) (10,000) (54,170) (46,909) (179,354)
Forfeited --- --- (3,790) (18,393)
---------- ----------- ----------- ----------
Options outstanding at December 31, 1992 2,383,383 $14,166,273 700,254 $4,900,586
========== ========== =========== ==========
</TABLE>
At December 31, 1992, 1,644,207 of the nonqualified stock options were
exercisable at prices ranging from $.47 to $16.00 per share or an aggregate
amount of $7,532,585.
11. RELATED PARTY TRANSACTIONS
Media Buying Service
The Company employs a media buying service to place its television and
radio advertising. The President of the Company is the beneficial owner of
25% of the capital stock of such service. In addition, a director of the
Company is an officer and the beneficial owner of a total of 25% of the capital
stock of such service. During the years ended December 31, 1990, 1991 and 1992,
such buying service placed a total of approximately $25,072,000, $30,695,000 and
$19,079,000, respectively, in broadcast advertising for the Company for fees
totaling approximately $999,000, $1,228,000 and $753,600, respectively.
Legal Services
A director of the Company is a principal of the Company's primary legal
counsel. Until his appointment as President of the Company on September 27,
1990, the President of the Company was a principal of that law firm. Although
he is currently "of counsel" to such firm, he has no financial interest
therein. Until his appointment as Senior Vice President -- Business Affairs of
the Company on February 1, 1993, a director of the Company approximated
$698,000, $1,049,000 and $732,000 during the years ended December 31, 1990,
1991, and 1992, respectively.
-14-
<PAGE> 15
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
Notes Receivable From Officers and Other Related Parties
Notes receivable from officers include a note receivable from the Chairman
of the Company for $750,000 advanced to him in connection with the purchase and
renovation of his residence. The loan is unsecured, without interest and is
repayable on demand or upon the sale of the residence. In addition, there is a
note receivable from the President of the Company for $575,000, which bears no
interest and is repayable solely from bonus compensation to which he may become
entitled through 1995, with any remaining balance payable on December 31, 1995.
There are additional notes receivable from several Senior Vice-Presidents of
the Company and a former officer aggregating approximately $640,000. These
loans also are interest-free and are payable on demand of the Company.
Distribution Fee Arrangement
In May 1991, pursuant to an agreement with NHI Nelson Holdings
International, Ltd. ("NHI") and Credit Lyonnais Bank Nederland, N.V ("CLBN"),
the Company became the distributor of existing and future film properties of
NHI's film entertainment group ("Sultan Entertainment Holdings Inc.") including
foreign distribution rights and domestic home video distribution rights to up
to 11 motion pictures to be produced by Castle Rock Entertainment from 1992
through 1995. The Company paid approximately $15 million in cash and issued to
NHI certain securities of the Company comprised of 150,000 shares of Common
Stock and five-year warrants to purchase 250,000 shares of Common Stock at
$13.87 per share to obtain these rights. Fees earned in 1991 and 1992 by the
Company under its arrangement with Sultan Entertainment Holdings, Inc. amounted
to $5,558,000 and $12,027,000 respectively.
Pursuant to this agreement, CLBN refinanced certain long-term debt of
Sultan Entertainment Holdings Inc. and also agreed to provide a new credit
facility to a newly-formed subsidiary within Sultan Entertainment Holdings
Inc., CR Memorandum. The proceeds of the new facility will be used to fund the
acquisition of foreign distribution rights and domestic home video distribution
rights to the 11 motion pictures to be produced by Castle Rock Entertainment
through 1995 ("Castle Rock Pictures"). The Company's financial obligations
with respect to CLBN's advances are limited to a guaranty of a percentage of
the unpaid loan balance, the dollar amount of which guaranty cannot be
determined at this time but which the Company in good faith estimates will not
exceed $1,000,000 for those rights which had been acquired prior to December
31, 1992. There can be no assurance that funds will be available under the
CLBN facility for the purchase of rights in connection with a Castle Rock
Picture. The Company's ability to distribute the remaining Castle Rock
Pictures is predicated upon the continued availability of funds from CLBN or
from other sources.
On November 27, 1991, the Company acquired the stock of Sultan
Entertainment Holdings Inc. for $100,000 in cash and contributed the stock to
the New Line Cinema Corporation Executive Benefit Trust (see Note 8).
-15-
<PAGE> 1
<TABLE>
<CAPTION>
Exhibit 99(b)
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30,
1992 1993
(DERIVED FROM
AUDITED
FINANCIAL
STATEMENTS) (UNAUDITED)
-------------- --------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,849,698 $ 6,737,170
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF APPROXIMATELY $640,000 IN 1992 AND
$972,000 IN 1993 35,968,253 73,144,937
FILM INVENTORIES 147,775,148 190,014,728
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION OF APPROXIMATELY $5,425,000 IN 1992 AND
$6,947,000 IN 1993 10,309,209 10,372,895
NOTES RECEIVABLE FROM OFFICERS AND OTHER RELATED PARTIES 1,965,000 2,010,000
OTHER ASSETS 6,540,881 6,516,644
INVESTMENT IN AFFILIATED COMPANY 17,937,997 19,833,997
-------------- --------------
TOTAL ASSETS $ 222,346,186 $ 308,630,371
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
-1-
<PAGE> 2
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1992 1993
(DERIVED FROM
AUDITED
FINANCIAL
STATEMENTS) (UNAUDITED)
-------------- --------------
<S> <C> <C>
NOTE PAYABLE TO BANK $ 58,500,000 $ 89,800,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 8,218,481 20,042,980
THIRD PARTY PARTICIPATIONS PAYABLE 23,834,301 33,612,893
LONG-TERM DEBT 30,000,000 30,000,000
DEFERRED INCOME 21,702,987 11,167,858
DEFERRED INCOME TAXES 7,800,121 9,479,121
-------------- --------------
TOTAL LIABILITIES 150,055,890 194,102,852
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, PAR VALUE $.01 PER SHARE; 300,000
SHARES AUTHORIZED; NONE OUTSTANDING --- ---
COMMON STOCK, $.01 PAR VALUE; 50,000,000 SHARES
AUTHORIZED; ISSUED AND OUTSTANDING:
12,728,560 IN 1992 AND 15,799,726 IN 1993 127,285 157,997
CAPITAL IN EXCESS OF PAR VALUE 37,825,947 70,593,844
RETAINED EARNINGS 34,552,348 43,984,305
-------------- --------------
72,505,580 114,736,146
TREASURY SHARES, 64,677 IN 1992 AND 62,677 IN 1993, AT COST (215,284) (208,627)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 72,290,296 114,527,519
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,346,186 $ 308,630,371
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
-2-
<PAGE> 3
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1992 1993
--------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUE $ 161,939,967 $ 238,693,989 $ 60,684,302 $ 62,209,752
COSTS RELATING TO REVENUE 140,143,193 198,934,042 56,479,774 49,791,850
------------- ----------- ----------- ------------
GROSS INCOME 21,796,774 39,759,947 4,204,528 12,417,902
OPERATING EXPENSES:
GENERAL AND ADMINISTRATIVE 16,905,719 20,433,096 6,249,418 6,546,390
SELLING 901,961 1,107,019 369,736 467,919
DEPRECIATION AND AMORTIZATION 1,867,978 2,775,000 718,171 786,000
------------- ----------- ----------- ------------
19,675,658 24,315,115 7,337,325 7,800,309
------------- ----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS 2,121,116 15,444,832 (3,132,797) 4,617,593
INTEREST EXPENSE (1,657,640) (2,527,525) (1,157,795) (888,613)
OTHER CHARGES (132,568) (388,623) (24,938) (164,522)
------------- ----------- ----------- ------------
INCOME (LOSS) BEFORE EQUITY INCOME OF, AND GAIN
ON ISSUANCE OF STOCK BY, AFFILIATED COMPANY
AND PROVISION FOR INCOME TAXES 330,908 12,528,684 (4,315,530) 3,564,458
EQUITY IN INCOME OF AFFILIATED COMPANY 1,325,000 1,896,000 575,000 1,741,000
GAIN ON ISSUANCE OF STOCK BY AFFILIATED COMPANY 4,334,867 -- 4,334,867 --
------------- ----------- ----------- ------------
INCOME BEFORE PROVISIONS FOR INCOME TAXES 5,990,775 14,424,684 594,337 5,305,458
PROVISION (BENEFIT) FOR INCOME TAXES 1,758,946 4,992,727 (6,000) 1,587,132
------------- ----------- ----------- -----------
NET INCOME $ 4,231,829 $ 9,431,957 $ 600,337 $ 3,718,326
============= =========== =========== ===========
PRIMARY NET INCOME PER SHARE OF COMMON STOCK $ 0.30 $ 0.56 $ 0.04 $ 0.21
============= =========== =========== ===========
FULLY DILUTED NET INCOME PER SHARE
OF COMMON STOCK $ 0.30 $ 0.53 $ 0.04 $ 0.20
============= =========== =========== ===========
PRIMARY WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 14,327,274 16,892,165 14,170,934 18,086,977
============= =========== =========== ===========
FULLY DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK OUTSTANDING 14,327,274 19,479,971 14,170,934 20,279,126
============= =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
-3-
<PAGE> 4
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1992 AND NINE MONTHS
ENDED SEPTEMBER 30, 1993
<TABLE>
<CAPTION> COMMON
CAPITAL IN STOCK
COMMON EXCESS OF RETAINED HELD IN
STOCK PAR VALUE EARNINGS TREASURY TOTAL
------ --------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 (AUDITED) $ 126,716 $ 37,592,837 $ 28,134,133 $ (215,284) $ 65,638,402
ISSUANCE OF 56,909 SHARES OF COMMON STOCK
UPON EXERCISE OF OPTIONS 569 233,110 -- -- 233,679
NET INCOME -- -- 6,418,215 -- 6,418,215
----------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1992 (AUDITED) $ 127,285 $ 37,825,947 $ 34,552,348 $ (215,284) $ 72,290,296
ISSUANCE OF 175,076 SHARES OF COMMON STOCK
UPON EXERCISE OF OPTIONS 1,751 627,820 -- -- 629,571
SALE OF 2,875,000 SHARES OF COMMON STOCK 28,750 31,821,079 -- -- 31,849,829
ISSUANCE OF 21,090 SHARES OF COMMON STOCK 211 318,998 -- -- 319,209
SALE OF 2,000 SHARES OF TREASURY STOCK -- -- -- 6,657 6,657
NET INCOME -- -- 9,431,957 -- 9,431,957
----------- ----------- ---------- --------- -----------
BALANCE, SEPTEMBER 30, 1993 (UNAUDITED) $ 157,997 $ 70,593,844 $ 43,984,305 $ (208,627) $ 114,527,519
=========== =========== ========== ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
-4-
<PAGE> 5
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1992 1993
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 4,213,829 $ 9,431,957
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
INCREASE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS 218,000 332,000
AMORTIZATION OF FILM INVENTORIES 80,379,843 113,678,266
DEPRECIATION AND OTHER AMORTIZATION 1,867,978 2,775,000
UNDISTRIBUTED EARNINGS FROM AFFILIATED COMPANY (1,325,000) (1,896,000)
GAIN ON ISSUANCE OF STOCK BY AFFILIATED COMPANY (4,897,476) ---
DEFERRED INCOME TAXES 1,350,527 1,679,000
CHANGES IN OTHER ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
ACCOUNTS RECEIVABLE (2,718,167) (37,508,684)
GROSS FILM INVENTORIES (95,229,336) (155,917,846)
OTHER ASSETS (3,257,149) 1,726,186
INCREASE (DECREASE) IN:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (4,443,778) 11,824,499
THIRD PARTY PARTICIPATIONS PAYABLE (6,438,246) 9,778,592
DEFERRED INCOME (22,096,285) (10,535,129)
------------- --------------
TOTAL ADJUSTMENTS (56,589,089) (64,064,116)
------------- --------------
CASH USED IN OPERATING ACTIVITIES (52,357,260) (54,632,159)
------------- --------------
INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (5,881,052) (1,585,686)
NOTES RECEIVABLE FROM OFFICERS AND OTHER
RELATED PARTIES 48,000 (45,000)
------------- --------------
CASH USED IN INVESTING ACTIVITIES (5,833,052) (1,630,686)
------------- --------------
FINANCING ACTIVITIES:
NET PROCEEDS FROM BORROWINGS ON NOTE PAYABLE 55,638,624 96,845,051
REPAYMENT OF NOTE PAYABLE --- (68,500,000)
PROCEEDS FROM ISSUANCE OF SHARES OF COMMON STOCK 138,522 32,805,266
------------- --------------
CASH PROVIDED BY FINANCING ACTIVITIES 55,777,146 61,150,317
------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,413,166) 4,887,472
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,333,485 1,849,698
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,920,319 $ 6,737,170
============= ==============
</TABLE>
SEE ACCOMPANYING NOTES.
-5-
<PAGE> 6
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1993
NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three- and
nine-month periods ended September 30, 1993 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1993. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.
NOTE 2 - FILM INVENTORIES
Film inventories, net of accumulated amortization, were
approximately as follows (in thousands):
December 31, September 30,
1992 1993
------------ -------------
Films Released $ 62,784 $101,437
Films Completed but Not Released 41,519 4,926
Films in Process 30,557 73,997
Distribution Rights 12,915 9,655
-------- --------
$147,775 $190,015
======== ========
-6-
<PAGE> 7
NEW LINE CINEMA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement 109, the liability method is
used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. These differences relate primarily to the gain on issuance of stock
by an affiliated company, advertising and print expenditures, third party
participations, and film amortization. Prior to the adoption of Statement
109, income tax expense was determined using the deferred method. Deferred
tax expense was based on items of income and expense that were reported in
different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated.
As permitted by Statement 109, the Company has elected not to restate
financial statements for any prior years. The effect of the change on pretax
income from continuing operations and the cumulative effect of the change for
the three- and nine-month periods ended September 30, 1993 was not material.
NOTE 4- SUMMARIZED INCOME STATEMENT INFORMATION
OF AFFILIATED COMPANY
The Company currently owns a 37.4% investment in RHI Entertainment,
Inc. ("RHI"), accounted for using the equity method. Prior to July 29, 1992,
the Company owned 52.6% of RHI. At December 31, 1992, RHI was significant as
defined by applicable regulations of the Securities and Exchange Commission.
The following summarizes the income statement of RHI for the three- and
nine-month periods ended September 30, 1992 and 1993 (in thousands),
respectively:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- ------------------
1992 1993 1992 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $39,642 $70,745 $21,324 $48,728
Costs and expenses 34,313 61,581 19,032 40,663
------ ------ ------ ------
Income from operations 5,329 9,164 2,292 8,065
Interest expense, net 625 472 92 286
------ ------ ------ ------
Income before income taxes 4,704 8,692 2,200 7,779
Provision for income taxes 1,812 3,424 847 3,073
----- ----- ------ ------
Net income $2,892 $5,268 $1,353 $4,706
====== ====== ====== ======
Company's share of net income $1,325 $1,896 $ 575 $1,741
====== ====== ====== ======
</TABLE>
-7-
<PAGE> 8
NOTE 5 - NOTE PAYABLE TO BANK
On March 26, 1993, the Company entered into a new credit facility
(the "Credit Facility") providing a revolving credit of $150,000,000 for a
period of three years. Except for the increase in principal amount and a
restriction on the amounts of permitted increases in selling, general and
administrative expenses, the terms of the Credit Facility do not materially
differ from the Company's previous credit facility.
NOTE 6 - COMMON STOCK
On March 5, 1993, the Company issued 2,875,000 shares of Common Stock
through a public offering. The net proceeds from this offering approximated
$32,000,000.
NOTE 7 - CONTINGENCIES
Legal Matters
An action is pending against the Company in the Supreme Court of the
State of New York, County of New York, by Smart Egg Pictures, S.A. one of the
joint venture partners with the Company in the initial "Nightmare on Elm
Street" film, for an accounting and damages of at least $5,000,000, together
with punitive damages in connection with the series of Nightmare on Elm Street
films, and for treble damages under the RICO laws. The Company believes that
there are good and meritorious defenses to the claims.
The Writers Guild of America, West, Inc. and the Directors Guild of
America, Inc. and Screen Actors Guild have each filed a demand for arbitration
against the Company seeking payment of residual compensation to writers,
directors and actors, respectively, involved in various productions, and
interest thereon. The claims do not specify damages. The Company has been
recouping amounts it believes were overpaid from residual compensation
otherwise payable. Such recoupment is also the subject of the arbitration
claims. Management believes that the Company has good defenses to the claims
and that its position on recoupment of overpayments is correct.
In May 1992, the Company, Allied Vision, Ltd. ("Allied") and
innovation Books, a division of the Innovative Corporation, were named as
defendants in an action brought by Stephen King in the United States District
Court for the Southern District of New York. The action sought to ban the use
of Mr. King's name in connection with the film "The Lawnmower Man" (the
Film"). The Film completed its theatrical release in the United States and had
its home video release on August 26, 1992. The action was settled in May 1993
involving a payment by the Company of $200,000 and an agreement to make no
further use of Mr. King's name in connection with the Film. The Plaintiff,
however, is seeking to hold the Company in contempt for violation of a consent
decree entered into as part of the settlement, dealing principally with
restrictions in the continued use of Mr. King's name.
-8-
<PAGE> 9
In this connection, the plaintiff is seeking unspecified damages, recall of
certain home video cassettes packages and legal fees.
In January 1993, Troma, Inc. commenced an action against the Company,
certain of its officers and directors and a former officer seeking damages in
excess of $50,000,000 for alleged failure to produce and release a motion
picture based upon the plaintiff's "Toxic Crusaders" characters. The named
officers and directors are entitled to coverage by the Company's policies of
liability insurance. The Company has obtained an order dismissing the tort
claims asserted by the plaintiff and expects to commence discovery shortly.
The Company and its subsidiaries are parties to various other legal
proceedings, all of which are considered routine and incidental to the business
of the Company and are not material to the financial condition and operation of
the business. In management's opinion, the ultimate outcome of these legal
proceedings, as well as the lawsuits discussed above, will not have a material
adverse effect on the financial position of the Company but, although not
probable, could have a material adverse effect on the results of operations in
any one year. At this time, the Company cannot predict the outcome nor
estimate the range of loss for the lawsuits discussed above.
NOTE 8 - SUBSEQUENT EVENT
On October 15, 1993, Turner Broadcasting System, Inc. ("TBS") and the
Company jointly announced that the two companies have entered into a definitive
merger agreement providing for the tax-free merger of the Company with a
wholly-owned subsidiary of TBS. Under the terms of the merger agreement, each
outstanding share of the Company's Common Stock will be converted into the
right to receive 0.96386 share of TBS Class B Common Stock. Based upon the
Company's outstanding shares, options, warrants, and convertible debt
securities, TBS would issue up to approximately 21 million shares of its Class
B Common Stock in the merger.
Consummation of the merger agreement is subject to the approval of the
Company's stockholders and customary conditions to closing. TBS is one of the
world's leading suppliers of entertainment and information programming. The
merger is scheduled to close immediately following a special meeting of the
Company's stockholders, currently expected to be held in December 1993.
9
